Fitch Warns of U.S. Rating Downgrade if Fiscal Cliff Isn’t Averted

By Michael Aneiro

Here we go again with the rating agencies. The election results are barely 12 hours old but Fitch Ratings has already sent a warning shot across the bow of Obama’s second term as president, saying on Wednesday that the U.S. triple-A credit rating is at risk if Washington can’t avoid the fiscal cliff and reduce the deficit.

For its part, rival rating agency Moody’s Investors Service said Wednesday that it would adopt a wait-and-see approach, putting off any decisions about a possible downgrade until the budget process plays out. Standard & Poor‘s famously stripped the U.S. of its AAA rating in August of 2011 amid the partisan budget gridlock that was responsible for creating the upcoming fiscal cliff in the first place.

From Fitch:

The newly re-elected US President Barack Obama will need to quickly secure agreement on avoiding the ‘fiscal cliff’ and raising the debt ceiling following Tuesday’s elections, Fitch Ratings says. The economic policy challenge facing the President is to put in place a credible deficit-reduction plan necessary to underpin economic recovery and confidence in the full faith and credit of the US. Resolution of these fiscal policy choices would likely result in the US retaining its ‘AAA’ status from Fitch. As reflected in the Negative Outlook on the rating, failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner as well as securing agreement on credible deficit reduction would likely result in a rating downgrade in 2013.

The fiscal cliff – some USD600bn of tax increases and spending cuts that come into effect on 1 January 2013 – and an increase in the debt ceiling are pressing issues that the President and Congress must address in the coming weeks if the US is to avoid a fiscal and economic crisis. Fitch estimates that the fiscal cliff would tip the US economy into an unnecessary and avoidable recession and result in an increase in the unemployment rate to above 10% in 2013. In Fitch’s opinion, the tax increases and spending cuts implied by the fiscal cliff would not fully address the longer-term drivers of higher public spending and the relatively narrow and volatile tax base. Moreover, the fiscal cliff would likely be at least partially reversed by Congress as the economy slowed and unemployment began to rise, perpetuating the uncertainty over government tax and spending policies that has weighed on the economic recovery. Fitch is currently projecting substantial deficit reduction equivalent to around 1.5% of GDP in 2013 as part of a medium-term deficit reduction strategy.

On current projections, the Treasury Secretary will likely have to implement extraordinary measures by year-end to maintain borrowing capacity under the current debt ceiling of USD16.394trn. Failure yet again to reach agreement on raising the debt ceiling in a timely manner – not Fitch’s expectation – would undermine confidence in the United States as a reliable borrower and thus its ‘AAA’ status, prompting a formal review of the US sovereign rating.

Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilise federal debt over the medium term, consistent with the US retaining its ‘AAA’ status. Conversely, failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch.

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There are 4 comments

NOVEMBER 7, 2012 12:58 P.M.

javfa wrote:

You would think Fitch would upgrade the US rating if we go off the cliff. It means we will have to start paying our bills.

NOVEMBER 7, 2012 2:06 P.M.

Robert David STEELE Vivas wrote:

There is no fiscal cliff, only an integrity chasm.

There is a solution, devised by Dr. Edgar Feige, that permits both the elimination of ALL other taxes starting with personal and business taxes, while still creating $3 trillion or more a year without borrowing. It is called the Automated Payment Transaction (APT) Tax. I have put together a short description and a variety of links including links to the APT Tax Home page, at this short URL:

I consider this the single most important initiative that the Obama Administration can take in the very near term -- it makes everything else possible.

Congress will resist since it eliminates the tax code they use to extort money from special interests, so I would double their salaries on condition that they eschew regulatory making as well, best left to the Executive with Congressional oversight.

NOVEMBER 8, 2012 9:26 A.M.

Steve wrote:

Nothing really matters anymore the US has re-elected an economic moron, now we're all f**ked.

NOVEMBER 13, 2012 3:29 P.M.

Ben wrote:

"You would think Fitch would upgrade the US rating if we go off the cliff. It means we will have to start paying our bills."

Fitch also gave high ratings to AIG and Lehman Brothers right before the financial crash. Don't assume they know what they're doing. Fitch has no more credibility than a homeless man on the street.